Motivations I ve Heard

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Collin Fletcher
5 years ago
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1 Reinventing USPS Costing Is It Needed? Should It Be Done? October 8, 2015 Motivations I ve Heard Accusations of Cross Subsidization USPS Playing Favorites The Joys of Census Data 2 1

2 By Brian McNicoll It s not like Congress hasn t seen this movie before. The Postal Service is swimming in red ink again, and the only thing that seems to increase faster than its debt is the level of dissatisfaction with its service. And yet again, the Postal Service s response is not to improve the service and reduce costs in its congressionally mandated monopoly business of last-mile delivery of first-class mail, but to set up a series of side businesses to try to cover the losses. If you have a monopoly on a business people used 155 billion times last year, that should be your core business and you should look to it for efficiencies. Instead, we get Metro Post, the service in big cities that delivers groceries to customers, and a proposal, now encapsulated in three different pieces of legislation, to deliver alcohol through the mail. Also, there s the deal to deliver packages for Amazon and the operation in New York City where postal workers load seafood from a local fish market for delivery to restaurants by 11 a.m., and even the wacky proposal by Sen. Elizabeth Warren (D-Mass.) to have the Postal Service enter the consumer loan market. People are less concerned with the Postal Service turning a profit than with receiving their mail reliably and on time. And that s not happening. A recent report suggests the number of letters arriving late has jumped by almost 50 percent since the start of the year, and that s with the Postal Service s new, more-relaxed on-time delivery standards. The Postal Service can deliver those fish in New York by 11 a.m., but it is unlikely to deliver any piece of mail to any address in one day anymore. But up to 15 percent of the mail that is supposed to arrive in two days now does not make it on time, and mail that is supposed to arrive in three to five days, now takes longer up to 44 percent of the time. In all, 484 million pieces of mail were delivered late through June that s up 48 percent in just one year. It s gotten so bad the Postal Service has stopped closing post offices and mail sorting centers until delivery times improve. The Postal Service says it must pursue these outside interests to compete with Fed Ex, UPS and other carriers because first-class mail no longer generates enough income to operate. Its leaders say the only option is to use its unique and existing assets a coast-to-coast, house-to-house delivery system to generate additional revenue from the revolution in e- commerce. First-class mail volume did decline 2.2 percent through the first three quarters of this year and is a fifth lower than a decade ago, according to the Wall Street Journal. But the volumes, as Steve Hutkins, whose blogs on the Postal System, are still immense. Checks, medicine, magazines, mail ballots, newspapers, greeting cards, court documents and communications from non-profits all travel through the mail and will for the foreseeable future. The reach for outside dollars is misguided, and the Postal Service s package delivery business easily the one that comes closest to complementing its core business provides a good example of why. The Postal Service s package business is booming, and is, in the words of Keith Byrd, a shipping consultant, absolutely taking market share from the small parcel carriers, especially on lighter-weight e-commerce. Revenue from these operations has increased 10.6 percent over the last year and now accounts for $3.56 billion of the Postal Service s $67.8 billion in revenue. But because the Postal Service is not truly set up to run a package business its leaders are right now shopping for 180,000 more package-friendly trucks it lost money on the venture. Labor costs alone rose by $8.8 billion in one year, and the Postal Service s own chief financial officer said the added time it takes to deliver packages in dense urban areas, which planners had not factored in, accounted for most of the increase. This follows a long pattern of the Postal Service failing at side ventures because it launched them without adequate costbenefit analysis. For example, Metro Post, the grocery delivery service, generated less than $1 in revenue for every $10 invested and, in one 10/15/15 Accusations/Implications of Cross-Subsidy Postal Regulatory Commission Submitted 2/2/2015 4:18:23 PM Filing ID: Accepted 2/2/2015 COMMENTS OF CAGW CITIZENS AGAINST GOVERNMENT WASTE FEBRUARY 2, 2015 COMMENTS BEFORE THE POSTAL REGULATORY COMMISSION WASHINGTON, DC In accordance with the Postal Regulatory Commission s (the Commission) open docket (ACR2014) for the U.S. Postal Service s Annual Compliance Report for Fiscal Year 2014 ( FY 2014 ACR ), Citizens Against Government Waste (CAGW) submits the following comments for consideration. CAGW is a private, nonpartisan, nonprofit organization founded in 1984 that represents more than one million members and supporters nationwide. The group s mission is to identify, publicize, and eliminate waste, mismanagement, and inefficiency in the federal government. CAGW has always been concerned with the practices of the U.S. Postal Service (USPS), particularly the agency s risky and opaque accounting practices. The true costs of all of the agency s products are currently not transparent or available. The lack of reliable and accurate cost data directly impacts the solvency of the USPS and taxpayers, who would be called upon as a financial backstop if current fiscal trends persist. CAGW urges the PRC to analyze and reveal the true costs of all of the USPS s activities, in particular new lines of business such as same-day delivery services, in order to determine whether these new products and services are self-sustaining or money-losing ventures supported by revenue from market dominant, monopoly protected products. For example, a February 5, 2014 USPS Office of Inspector General report on a same-day delivery experiment in San Francisco, California found that The Postal Service did not properly implement the pilot. They did not have sufficient participation from the six selected retailers to achieve the required daily minimum target of 200 packages per delivery day. Only 95 packages were sent by the six participating retailers over a 5-month period. However, only one large retailer agreed to participate in the pilot, and later withdrew prior to implementation due other operational priorities. The Postal Service was left with small local retailers that could not produce the target daily package volume. The Postal Service earned $760 and incurred costs of $10,288, with a net loss of $9,528. Despite the clear failure of this project, just over a month later, the IG released a report on March 13, Same-Day Delivery: An Opportunity for the Postal Service? that called for additional tests of same-day delivery. The OIG stated that As First Class Mail continues to decline and further disruptions to postal operations are sure to come, new revenue streams will be crucial to the Postal Service s survival. Same-day delivery raises challenging questions for the Postal Service. Will consumer demand increase as the service becomes more widespread? How will it disrupt the parcel delivery business, which the Postal Service is relying on to replace revenue lost from declining First Class Mail? Do the potential rewards for providing the service now outweigh the risks? The IG concluded that, The Postal Service is right to test same-day delivery on a relatively modest scale. As First Class Mail continues to decline and further disruptions to postal operations are sure to come, new revenue streams will be crucial to the Postal Service s survival. The Basis and Extent of the Monopoly Rights and Subsidies Claimed by the United States Postal Service Robert J. Shapiro March 2015 September 14, 2015, 11:00 am Congress should not expand responsibilities of postal service 3 But What Is A Cross Subsidy? Incremental Cost Test: The revenues collected from any service (or group of services) must be at least as large as the additional (or incremental) cost of adding that service (or group of services) to the enterprise s other offerings. If Incremental Cost Test Met, There Is No Cross Subsidy 4 2

An Economic and Intuitive Standard If revenue exceeds incremental cost, then USPS offering product: Improves USPS finances Benefits other users of postal system Not allowing USPS to provide product

3 An Economic and Intuitive Standard If revenue exceeds incremental cost, then USPS offering product: Improves USPS finances Benefits other users of postal system Not allowing USPS to provide product for which revenues exceeds incremental cost hurts USPS finances. And USPS has financial incentive to charge packages what market will bear 5 Incremental vs. Attributable Cost [T]he Postal Service measure of attributable cost understates the value of a product s true incremental cost by only a small percentage amount. -- John Panzar 6 3

4 PRC Has Consistently Found No Cross Subsidization Table III-6 Total Competitive Products Volume, Revenue, and Cost ($ Millions) FY 2014 FY 2013 Difference % Change Volume 3,448 3, % Revenue 15,280 13,741 1, % Attributable cost 10,970 9,881 1, % Contribution to institutional cost 4,310 3, % Source: FY 2014 and FY 2013 Postal Regulatory Commission Financial Reports, Appendix A. 7 Fully Distributed Cost FDC includes: Incremental cost plus A non-causal allocation of other costs Not economically meaningful Requiring revenue to cover FDC costs would result in: Bad pricing decisions Loss of profitable volume 8 4

5 Two Cents From Our Foreign Correspondent 9 Playing Favorites Pricing Investments 10 5

6 Pricing 12.0% 10.0% 8.0% 8% 8% 9% 10% 10% 10% 9% 8% 8% 6.0% 4.0% 2.0% 3% 2% 2% 2% 1% 0.0% Parcel Select DDU Lightweight CPI 11 Investments Invest where capacity is needed Common sense Not playing favorites Why replace vehicle fleet? It s really old! 12 6

7 Tracking Data 13 Full-Service IMb Not a census Barcodes are on mail USPS costs mostly for people Opportunity for improvement Not a cure all 14 7

8 Recommendation Current overarching costing framework is correct. Some costing methods can be updated and improved. Existing PRC procedures for updating methods are appropriate. Thorough vetting High bar 15 8

U.S. Postal Service Financial System Upgrade is Successfully Completed. Online Customers Can Visit USPS Site for All of Their Holiday Shipping Needs

Issue 17 November 20, 2013 CONTENTS U.S. Postal Service Financial System Upgrade is Successfully Completed Online Customers Can Visit USPS Site for All of Their Holiday Shipping Needs U.S. Postal Service